Federal prosecutors have informed four former executives of Gemstar-TV Guide International Inc. that they are targets of a criminal probe of possible securities fraud, according to court documents.
Prosecutors made the disclosure as part of a motion in federal court in Los Angeles to temporarily delay a Securities and Exchange Commission lawsuit against former Chief Executive Henry Yuen and former Chief Financial Officer Elsie Leung.
The filing this week by the U.S. attorney's office asks a judge to halt the discovery process in the SEC case until March, or until the end of any criminal case arising from a grand jury indictment issued before then. Unless discovery is delayed, prosecutors said, the SEC might have to turn over documents to the defendants that could jeopardize the criminal prosecution.
The filing didn't name the four former executives, but it said prosecutors were examining "the same alleged fraudulent scheme and transactions" cited in the SEC case against Yuen and Leung. "Thus far, none of the targets of the government's investigation have indicated their willingness to plead guilty to charges" in the matter, the document said.
The SEC's civil fraud case, filed against the two in June, alleges that they engaged in an elaborate scheme to inflate the firm's revenue by $223 million over a two-year period.
Attorney Stanley Arkin, who has been representing Yuen and Leung, could not be reached for comment. But he has called the SEC charges "as unfair as they are fragile and arbitrary."
The intervention by the Justice Department is the latest twist in a lengthy accounting scandal that enveloped Gemstar, the Hollywood-based publisher of TV Guide, and hastened the departure of its top management last fall. The two stepped down after the SEC launched its accounting probe and Gemstar's largest shareholder, News Corp., wrested control from them.
In its suit, the SEC claims that Yuen and Leung aggressively touted as the growth engine of the company an interactive program guide that would generate revenue from both advertising and licensing fees. To meet ambitious projections to Wall Street, the executives improperly booked revenue as coming from interactive ad and licensing fees when in fact it was derived by other means, according to the suit.
In one case, the suit says, Gemstar booked $113.5 million in licensing revenue from Scientific-Atlanta Inc. even though its contract with Gemstar had expired and was being contested. In other cases, Gemstar paid third parties for certain transactions, then received some money back and booked it as interactive ad revenue, the suit says.
The complaint alleges that Yuen and Leung were enriched by these manipulations because their compensation was in large part based on Gemstar's financial results. During a two-year period, Yuen earned $18.8 million in salary and bonuses, exercised stock options for about $14.6 million and made $63.6 million by selling Gemstar stock, according to the SEC.